Thursday, July 16, 2009

Erring With Air T

Air T (AIRT) has all the makings of a grossly undervalued stock. It has a P/B of .7, a P/E under 5, and a net cash position (cash minus debt) of over $7 million, while the stock trades for $18 million. The company has been able to maintain strong levels of profitability throughout this downturn, and even pays a dividend yielding over 4%. It operates in three distinct segments which, as we've discussed, helps diversify away risk. While AIRT could very well turn out to be a terrific long-term investment, further study indicates that there are some serious risks that could also dampen future returns.

First of all, 100% of AIRT's revenue in its largest segment is from one customer, Fedex. AIRT is charged with operating 82 aircrafts for Fedex, but these contracts can be cancelled by Fedex with just 30 days notice. While it is conceivable that Fedex will not cancel these contracts for several years, 50% of AIRT's consolidated revenue is reliant on this fact!

In the other segments, the situation is not dissimilar. About 25% of AIRT's consolidated revenue comes from the US military for the manufacture of airplane de-icing machines. While these are produced under contract, and have been since 1999, those contracts expired in June of this year. The military has issued a request for proposal, but the jury is still out on whether AIRT will be able to renew.

Finally, AIRT receives a majority of its revenue in its third segment, maintenance and support, from Delta Airlines. While these services are also performed under contract, this contract is set to expire in just over one year.

While AIRT is currently showing strong earnings in its most recent periods, these earnings may have peaked: the company's backlog at March 31st, 2009 was just $8 million, compared to $25 million in the year-ago period. Furthermore, an examination of the risks reveals that while the stock may trade at low levels relative to AIRT's earnings power, that earnings power does not have a whole lot of downside protection.

Disclosure: None


edpin said...

Very good post, Saj. AIRT was on my "to analyze" list. I'm glad you got there first so that I can watch out for these red flags when I do my own analysis. Thanks!

Anonymous said...

A poorly drafted and inaccurate report. The AF contract was awarded to AIRT. The backlog just increased another $14m.

What about the 2009 increase in the dividend from .30 to .33?

AIRT is a small company with no debt and plenty of cash. The FedEx contract is a non-issue since AIRT dry leases the planes and costs are passed on. The profitability to AIRT of this contract has always been low. It just represents a steady revenue source. From my view point the contract has very little value.

Why trash a good company that has shown organic growth and profitability in a poor economic climate?

Saj, you owe the company an apology!

Saj Karsan said...

Thanks for your comments, guys.

Anon, about 35% of the company's operating income comes from fedex, so I wouldn't call the contract 'of very little value'.

Sorry about not mentioning the AF contract. Between the time I wrote the article and scheduled it for publishing, the contract was announced. However, it should be noted that the contract can be cancelled after one year, so the revenue risks discussed in the article still remain going forward.

Anonymous said...

Saj, I respectfully disagree.

1. For each year for the past 3 years AIRT's has grown revenues and profits from Global, further reducing its dependence on FedEX.

2. Why didn't you mention the increase in the dividend? A company in trouble does not increase its dividend- especially a company with very conservative management.

3. As to FedEX, AIRT will make more money this year on aircraft repairs. This part of the business runs on a cycle.

4. Why not hold off in publishing the article knowing that it was inaccurate at the time of its release? Your explanation is disengenuous.

5. What about the fact that management has bought some stock, has not issued itself cheap options and are not over paid?

6. Why not mention that AIRT has been successful in penetrating the foreign markets as evidence by the Chinese gov't contract two years ago?

Why trash this company, it is one of the best micro caps out there?

Saj Karsan said...

Hi Anonymous,

In no way did I trash the company. I mentioned their strong profitability, their dividend yield, and suggested it could turn out to be a terrific long-term investment.

The article, however, was about risks to their revenues, which is something investors should be aware of. The news release of a contract that is canceleable after one year does not do much to change those risks.

The article was not, however, a full analysis of the company (which would require pages and pages and is not a service offered on this site) and therefore there was no reason to go into dividend increases, insider purchases, and international revenues.

Anonymous said...

So, if I understand you correctly, your article was merely a "sound bite" with litle substance or value since it was not intended to be a complete analysis?

What micro cap is not dependent on a steady revenue stream? You completely miss the historical perspective showing that AIRT has diversified and succeeded where others have failed.

Why did you feel the need to write an article on a micro cap with no institutional following? You clearly created the impression that investors are at risk! Isn't that inherent in any speculative investment?

I really question your motivation since you acknowledged that you knew about the AF order before the article was "released". Don't you owe your subscribers a clarification/update?

jake_m said...

Thanks for the post Saj!

Anonymous seems to be missing the point a little. Your point is that AIRT's revenues are largely dependent on a few customers, many of whom can "pull the plug" with little notice. That is a good point, and I am glad that you have brought it to our attention. I discussed a similar point with you in the comments section of your June 22nd post.

Anonymous - the idea of Saj's post is that he (or she?) is bringing red flags to our attention - not doing our analysis for us! I have no interest in getting "buy" or "sell" opinions from a website (or, with all due respect, from anonymous commentators). I read the blog because it helps me assess stocks on my own.

Anonymous - if you decide to write your own article on AIRT, please copy a link to it on this blog. I'd be interested to read it. You seem to have some strong views on this company.

Saj Karsan said...

Hi Anonymous,

I did not know about the AF contract before the article was released.

But that's beside the point. Jake is right: this is not a site offering my recommendations/trashings for readers to follow blindly. Instead, the focus is on showing investors how to recognize risks, often using examples, so that they can make their own decisions.

Since you ask, there are many microcaps discussed on this site which are not reliant on 2-3 customers for a majority of their revenue. Some of them have other risks, however, and so those risks are discussed.

Anonymous said...

Saj- AIRT just announced blow out earnings. Admit you were wrong!

Saj Karsan said...

Hi Anonymous,

I've been wrong many times, but I'm not sure what you're referring to in this case. This site is not about making short-term trades on predictions of quarterly results, but about long-term investing.

On another note, I'm further puzzled by your calling these "blowout" earnings, as they resulted in the stock ending down 5% following the announcement, on earnings which were 20% lower than last year.

Anonymous said...

I am puzzled by your comments.

1. Did you forget that there we are in a recession? Almost every service/products company has guided lower. The earnings were excellent, regardless of the market reaction.

2. Are you saying that a stock trading at less then 5X trailing earnings is over priced?

3. Do you really believe that there is any significance in today's trading. This is a thinly traded micro cap stock. It can be manipulated easily- as it has been in the past.

4. Why do you even care about this stock? There are thousands of micro caps out there. Why did you decide to pick on AIRT? Your comments today show your bias against this company.

Saj Karsan said...

Hi Anonymous,

Your expectations may be too low if you felt those were blowout earnings. Yes this a recession, but the company publishes a backlog number and operates on contract, so in the short-term it is relatively predictable.

The article said AIRT "has all the makings of a grossly undervalued stock". I'm not picking on the company; there are probably around 100 small caps discussed on this site in the last year. Try not to take it personally if some risks are discussed about your favourite one of them.

Anonymous said...

Look at the stock price recently? All technicals look extremely bullish and the stock is hitting new highs everyday.